A top executive at Russia’s largest private oil company is predicting a rough couple of years for the country’s crude production. Leonid Fedun, the vice president and second largest shareholder of Lukoil, said that a combination of Western sanctions and low oil prices will force an eight percent drop in Russia’s oil output over the next two years. Reuters reports:
[Leonid Fedun] said he expected production of oil, Russia’s key export commodity, to fall. “Everyone will reduce production because everyone is reducing drilling,” Fedun said.The estimate is one of the most pessimistic yet by a Russian oil executive since the country was hit by Western sanctions over the Ukraine crisis and a steep drop in oil prices. […]Earlier on Tuesday, Lukoil said its 2014 net income fell 39 percent due to weaker oil prices and non-cash impairment losses.
Sanctions have been designed to target Russia’s medium to long term energy plans while attempting to leave its current output alone, for the simple reason that Europe is still very much reliant on Moscow’s hydrocarbons. So far that seems to be working, as Russian production is expected to remain fairly steady this year, but these new Lukoil projections suggest that the coming drop-off could be precipitous.That’s in large part thanks to declining output in Russia’s most productive fields. As these plays run dry, producers have to spend more to drill new wells, and with oil selling for roughly half of what it was last June, the economic incentive for chasing higher-cost production just isn’t there. Combine that with sanctions aimed at preventing the Western technology necessary to unlock the Siberian shale deposits from reaching Russia and you’ve got a very good reason to be pessimistic about Moscow’s output.This is of course a massive headache for Putin, whose government derives a huge portion of its budget revenue from oil and gas exports. The Russian economy is far from dynamic today, but once the flow of crude starts slowing things could get very sour very quick.